Geographic Concentration and Diversification Strategies in Japanese REITs: The Tokyo Concentration Measure and Its Impact on REIT Stock Return Volatility

Abstract

This study investigates the concentration of Japanese Real Estate Investment Trusts (J-REITs) in Tokyo and examines their internal diversification strategies across property sectors, locations, and acquisition prices. The primary objectives are to analyze how Tokyo concentration affects REIT stock return volatility and to assess the effectiveness of diversification strategies in mitigating this volatility. A new metric, the Tokyo Concentration Measure (TCM), is introduced to quantify the hierarchical geographic concentration within Tokyo. The TCM is straightforward to calculate and captures multilevel classifications from regions down to specific wards. The empirical analysis utilizes detailed property portfolio data and panel data models to examine the relationship between the TCM, diversification measures—including property sector entropy and acquisition price diversification—and stock return volatility. Key findings reveal a gradual decline in Tokyo concentration since 2019. Moreover, higher Tokyo concentration is associated with increased REIT stock return volatility, indicating that concentration in a single metropolitan area amplifies investment risk. In contrast, greater diversification in acquisition prices reduces REIT stock return volatility, suggesting that investing across a range of property values enhances portfolio stability. Notably, diversification across property sectors does not impact stock return volatility.